Earthquakes Show Supply Chain Risk Extends Beyond Supplier Financial Viability

Inside many companies, the recession has caused supply risk to move from a secondary issue to a primary concern. Despite this interest, many companies are approaching the topic from a narrow scope, considering only supplier financial viability as a risk driver in their supply chain. According to Spend Matters' affiliate site, MetalMiner, the Chilean 8.8 magnitude earthquake shows that supply disruptions can take many forms--and not just from suppliers going bust or cutting corners. According to MetalMiner, the "disaster serves as a reminder that supply risk in the form of supply disruption remains alive and well for many metal markets." But geographic risk from proximity to moderate or high probability disaster extends beyond the metals markets.

Spend Matters wrote about this subject in regards to Apples' Supply Chain a couple of years ago. In that post, I referenced a story that talked about how two critical Apple suppliers (who supplied the same parts) were located in close proximity to each other. "Now this might not be such a bad thing if there were not such an array of geographic risk elements built into the regional sourcing equation," I wrote at the time. But when the same two suppliers are located within 20 miles of an active volcano and in "proximity within an earthquake zone (which makes San Francisco's seismic activity look tame)," not to mention facing "the very real threat of tropic storms and typhoons," the supply risk picture begins to look shaky. And stormy.

Any time competitive suppliers are located within close proximity, companies should raise red flags if the geographic area presents any risk factors that are out of the ordinary. They should also look for back-ups as well. In the case of Chile and Copper production, the country only accounts for "about 35% of the world's copper production" yet any disruption "could send prices up in the short term" not to mention raising the specter of supply shortages. As companies get more sophisticated in modeling supply chain risk, they should understand the geospatial implications of their multi-tier supply chains from tier one suppliers to raw material producers, seeking to identify risk factors before they become reality.

Jason Busch

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